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Lowenstein and The Villain

Roger Lowenstein’s profile of Fed Chairman Ben Bernanke is absolutely worth reading. Like his book When Genius Failed, which is still among the best short studies of this world of stochastic engineering, here in The Atlantic he does an excellent job converting the intricacies of monetary policy into a comprehensible vernacular.

Lowenstein is certainly not always right on every particular (associating Bernanke with both Friedman and Roosevelt, while provocative and a bit bracing, sort of resolves into penumbral confusion), but his wider narrative is sound. Moreover, he is admirably fair to all sides (which contributes to some elisions). He even quotes a respected goldbug at the very end.

He is emphatic about the distinction between monetary policy (Friedman did indeed conclude that over-tight money prolonged the Great Depression) and fiscal policy. Now and then you’ll get the rhetorical knives flashing against the absurdity of Helicopter Ben and his dollars from the sky; as a fact the imagery should be Helicopter Milt. But someone vituperating against Milton Friedman would seem decisively out of place at a Tea Party rally.

All of which gets back to my suspicion that it is in the interest of almost every nefarious actor, from agitator and demagogue to financier and politician, so to blur and obscure the fiscal and monetary distinction, as to insure for himself a more facile rhetorical position. He can avoid the hard decisions of fiscal retrenchment by pretending its Bernanke’s fault. He can obscure the difference between tight money and fiscal austerity, merging them into one indistinguishable muddle, and thus conceal the possibility of an intelligent observer who favors looser money and more austere government budgets, a la Cameron’s government in the UK. These devices are tiresome but effective. The subtleties of this business are formidable. But if we to permit the idea that money supply and the welfare state are the same vexation, we might as well say that loose screws and loose women are the same problem.

So on the whole I take it as a strong note of integrity when an interpreter like Lowenstein insists on this conceptual rectitude.

Now that we have a Federal Reserve is a fact. That statutes of some antiquity — themselves formed in imitation of older American statutes — supply the structure of this central bank, distinguishing it for some similar institutions elsewhere, is another noteworthy fact. That we ought to have fiat currency is a more contested conjecture, but that we have one is not. Another contested fact is whether we have (or at least recently had) a wild-west regulatory environment, which in function gave shadow banks an opportunity to write paper promissory like an appendage of the sovereign. AIG printed a hell of a lot of American money with its default-swap trade; it operated like a lawless state-chartered bank in the days after Jackson, free to issue scrip to whatever sucker was willing to buy. A lot of this money was backing the US housing market.

Long-Term Capital Management was in the same game, up until its demise some twelve years ago. It helped the Italians work their bond markets into shape for the euro entry. It arbitraged the Treasury market. It absorbed risk in great quantities from various actors, performing a service they desired, collecting big fees, freeing more and more “product” to enter capital markets, smoothing over fixed-income oddities, and generally accelerating the circulation of capital by prodigious amounts. It used important connections and dazzling wizardry to mesmerize clients. It was the most prestigious enterprise in a pretty much free market.

This plutocratic unity of state and financier bulks big in the story of free enterprise’s subjection to supererogatory finance abstraction. The Federal Reserve is unquestionably bound up in its machinations. It’s possible that leaving the gold standard in the 70s was a huge mistake. It’s possible that deposit insurance is unwise. It’s highly probable (in my judgment) that broker-dealers should have never sold public shares but stayed private partnerships. But it’s highly improbable that a ritualized dismantling of the Fed, perhaps including an attack on the lender-of-last-resort function, will do any good. The expedient demonization of Ben Bernanke should stop. He’s had some meaningful successes achieved in the heat of crisis for which Americans ought to be thankful, given the alternatives; his subsequent ameliorative policies are more problematic, but only time will tell.

In my estimation, however, the real and lasting damage to our economy has come from other quarters than the central bank.

The financial markets use stochastic models to represent the seemingly random behaviour of assets such as stocks, commodities and interest rates. These models are then used by quantitative analysts to value options on stock prices, bond prices, and on interest rates, see Markov models. Moreover, it is at the heart of the insurance industry.

Alex--he means random. The reference to "Markov" indicates that. A stochastic process is like a series of dice throws or coin tosses with a fair coin. The result of each toss is independent of the results of the others. So you're supposed to infer what is going to happen by the other things you know about the system (e.g., that the coin is fair or the die has six sides or whatever) not from what has already happened in your series of tosses.

So I guess "stochastic engineering" is trying to set up models of risk and make a profit in connection with some sort of financial "thingies" (financial products and so forth) that each separately have a level of risk where that risk is bundled. A little bit like an actuary for an auto ins. company trying to figure out if his company is doing okay based on the cumulative, but independent, probabilities of the various people in the risk pool having car accidents.

Emanuel Derman, a South African-born theoretical physicist turned financial quant for Goldman Sachs and Director of the Financial Engineering masters program at Columbia University, recently wrote an interesting book titled Models Behaving Badly. Now, I am somewhat sympathetic to Derman having arrived at the FE program as a student the same year, 2003, he did to become Director. I eagerly attended the alumni event last fall where he introduced his book, picked up a copy and read it over the next day or so interested to see what one of the pioneers had to say about the place of stochastic financial modeling in the world economy given all that's happened. Now the book is actually about one-third personal memoir and another third is devoted to discussing models of the physical world. I was a little surprised to discover that the final section consisted mostly, as I read it, of an explanation why financial models are only very rough approximations of reality and can't be relied on too heavily when managing risk but can nevertheless be useful if used properly and in a limited capacity. So there it was, it boiled down to basically: yes maybe, be careful, no promises, watch out. This from a guy who has his own binomial short-rate model named after him (and two others including Fischer Black) for modeling fixed income derivatives (which I happen to use often at my job).

I've known for several years that the entire mass of financial derivatives in the system, from CDS to interest rate swaps to currency swaps, don't actually disperse any risk. The sheer amount of counterparty risk inherent in the derivatives timebomb far and away overwhelms any risk hedging that they actually perform. I think the massive expansion of derivative securities for use in portfolios, which I think began in earnest in the late 1980's and early 1990's, can best be seen as allowing risk managers to label their portfolios as hedged. It's optics and nothing more. See the dollar, as a functional currency, had reached the end of its timeline where further expansion, needed to keep pace with a growing economy, would no longer be tolerated by the market without some kind of guarantee. So currency swaps and interest rate swaps and options sprang up to answer the call. Now every portfolio can have a sticker applied to it that says: "Hedged: delta risk equals zero". But I think we're reaching the point where this perception is breaking down. The derivatives markets are trying to expand further, to keep all those stickers valid. The Fed has gotten into the game big-time with its trillion dollar currency swaps. I don't think it's going to hold together.

The only primer on basic economics that I've read from cover to cover is Henry Hazlitt's Economics in One Lesson. That's almost like admitting that my knowledge in this field is at the comic book level.

I once began reading von Mises' treatise Human Action, but soon ended up staring at the pages in ignorant awe.

So the big question remains: what will replace American dominance when it goes? What will anchor fixed-income asset pricing after the dollar reserve has expired? There are a lot of interesting predictions out there. Perhaps the most persuasive theory I've heard is that high-quality corporate paper could anchor fixed-income rather than US currency. I mean, imagine the subscription in a hypothetical Apple issuance of 30-year bonds?

As I understand your view, it imagines a European-guided restoration of physical gold to anchor a more globally-balanced financial marketplace. Like I say, really, really interesting.

Notice, however, the phrase at the end of my first question: when it goes. Has the dollar truly run its course? That is another question of huge import and difficult in the extreme to predict.

Alex -- Honestly I was just kind of taken with the word in the course of trying to quickly compose post, which I've only heard one other finance guy use (which may just show the limit of my experience with finance guys). Lowenstein's description of the 30-year Treasury arbitrage that LTCM mastered in the 90s (though it was first implemented by Meriwether in the 80s) is the best description of how this stochastic stuff works in practice. I tried my hand at a description here: http://christendomreview.com/Volume002Issue001/cella.html

There are a lot of interesting predictions out there. Perhaps the most persuasive theory I've heard is that high-quality corporate paper could anchor fixed-income rather than US currency. I mean, imagine the subscription in a hypothetical Apple issuance of 30-year bonds?

Frankly, I wouldn't touch a long term issue based on any tech asset of any sort. It's not that tech assets aren't good, it's that there is no predicting the long term on any ONE of them. IBM, good ole' Big Blue, was considered more gold than, well, GOLD, back in 1975. In 2005, not so much. Look at the difference between Dell 2002 and Dell now, only 10 years later.

Generally, I could see (for long term) going more to brick and mortar type assets: Coca Cola, Proctor and Gamble, or oil. People are going to drink soft drinks in 30 years, even if it's going to be some other drink. People are going to need laundry soap no matter what. But even there, any one of them company can be done in by (for example) a bad law suit, a change in law, a union strike problem, or a foreign competitor with some deep advantage. Far better, if possible, to put your confidence in some kind of a merged corporate paper that represents more companies from more different industries. S&P 500 paper, anyone? Would that work?

Paul, thanks. I think sovereign debt will still be the benchmark for fixed-income securities. But existing debt has to be devalued significantly. There's too much debt and it's impossible to service in real terms. (As I've said before, the debt buildup is a feature of the dollar reserve system which has no mechanism for settling international trade. My view is eventually gold bullion will fill this role preventing future unsustainable debt creation. Not a gold standard.) And yes, I expect the devaluation to be against physical gold bullion primarily. Think of the devaluation as the debt being paid off not by future production but by past production or savings (since most of the world holds its savings in debt or paper of one form or another). So the reset consists of the perceived value in paper declining and the perceived value in the actual physical world, chiefly gold bullion, increasing. A re-capitalization through value expansion (gold) rather than volume expansion (printing). The ECB is set up to have its reserves expand in value, the Fed as it exists today can only expand in volume.

Is the dollar certainly finished? Well the insurance market, derivatives, for the dollar world is an order of magnitude or two larger than the market its meant to insure. The hedges for first and second order changes in the market overwhelm the market itself. Think OTC derivative notional value of $500-$700 trillion vs. dollar debt in the tens of trillions. It doesn't look good, like a dying star that first blows up into a red giant before the end. I imagine the dollar will be seen to work just fine right up until it doesn't.

Great deal for those who already hold gold bullion, not such a great deal for those who hold silver, platinum,... Is there a reason that kind of inequity is justified?

How about the scrapping of a system that strongly encourages saving in paper monies that lose value every year for a system that strongly encourages saving in an asset which holds or gains in value every year. I think this would also have the effect of localizing capital investment (know your partners and know the business) and restrict non-local capital investment to those, like Zippy, who really seem to know what they're doing and can actually read and understand balance sheets and cash flow statements and have the skills to analyze sectors and risks. Ma and Pa shouldn't have to risk their savings in the capital markets--with or without a financial advisor or the use of mutual funds--to fund their retirement, that's what bullion is for. Recall that the mutual fund industry didn't always exist. It came about partly as a result of the Studebaker bankruptcy in the early 60's and the destruction of that company's pension system. But with a stable, universal store of value, mutual funds and amateur investing become obsolete.

I think a functioning, stable financial system is well worth a one-time wealth redistribution towards those with proper foresight. Not that I think it could be stopped anyway, as I see this as a market-driven event and not one brought about by the deliberate action of a sovereign government.

I think a functioning, stable financial system is well worth a one-time wealth redistribution towards those with proper foresight.

I am not questioning the change to a stable system, one where your assets are known, real, hard and localized; and that paper holders will lose out. I am questioning why we ought to consider those who hold gold as having "proper foresight" and those who hold silver as "you know what happened to those who held paper, right?" What makes gold the metal that ought to be preferred over other noble metals?

I feel like I'm threadjacking, but Tony, the short answer is that the big money appears to have made their choice and we little people, temporarily, have the option to follow in their wake if we choose. One of the main signposts is that the world's central banks hold gold in their reserves, not silver or platinum. Another is the above ground stock of gold bullion (unconsumed) is far larger than any other precious metal in absolute terms and especially as a percentage of yearly mine production. In other words, gold isn't good for much except hoarding, exactly what you want in a physical store of value that, when hoarded, won't negatively affect the world economy (unlike, say oil or corn or silver to a lesser extent). And there is the whole intriguing oil for gold arrangement that appears to have been made during the 1980's to hold the dollar currency together long enough for the euro to come online as an alternative global medium of exchange. I've copied this intro here before and is what FOFOA has based a lot of his excellent work on:

When the once highly secretive London Bullion Market Association (LBMA) -- its venerable membership comprising the world's largest gold dealers -- published its daily clearing volume for the first time in January 1997, it rocked the tight-knit world of international gold traders and analysts.

According to this first of many subsequent LBMA press releases, thirteen hundred tonnes of gold (representing more than 50% of the world's annual mine production) changed hands daily in this fog-shrouded center of the global gold market. This figure represented over $10 billion per day and $4 trillion per year in bullion banking activity!

The gold market had always stood in austere, quiet contrast to the highly charged, mega-volume world of stocks and bonds. Now this first LBMA report forced analysts, investors, and brokers to reassess their understandings of the gold market. While some revelled in the glow of the large LBMA numbers, others began to raise some very important and rather unsettling questions. First, Why was this much gold on the move? Second, Where was all this gold going? And third, Where was all this gold coming from?

Then, in October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text. If you are not similarly moved to at least reassess your own view of the international financial scene after reading what's revealed below, then you are either firmly entrenched in your world view, or you've been numbed by too many hours of Wall Street's cheerleader (CNBC) and too many Friday nights with Louis Ruykeyser.

What matters most to us here at USAGOLD is ANOTHER's educational value to all who would take the time to read and think through his (at times) arcane and cryptic commentary of international economic dealings behind-the-scenes. ANOTHER demonstrates a feel for and understanding of the gold and oil markets that indicates connections at the highest echelons of international finance, yet for reasons having to do with his "position," as he has indicated, he wishes to remain anonymous. If his "THOUGHTS!" are theory; they are good theory. If they are speculation; they are reasonable speculation. If they are supposition; they are well-grounded supposition.

In the final analysis, ANOTHER offers one of the more plausible hypotheses for why the financial markets have acted as they have in the past few years, and therein lies his immense value to the reader, no matter who he is. Again, knowledge as is conveyed in his series of "THOUGHTS!" is rarely to be found outside the highest levels of international finance, and is seldom to be seen bandied about on the front pages of The Wall Street Journal or your favorite financial newsletter.

As explained by ANOTHER, an opportunistic arrangement for massive physical gold acquisition among important petroleum producing and exporting nations could be comfortably facilitated within these astronomical trading volumes now being publicly revealed via the LBMA. For the oil states this meant receiving real money (as opposed to government-sponsored paper) in payment for their depleting oil reserves. For the industrialized countries, this meant a continuing supply of cheap oil to fuel the economic boom already in progress. These transactions were to be cleared through the bustling London gold market. Up until late 1996, the volumes were a tightly kept secret so "the deal" proceeded without the knowledge of the general public.

When the LBMA went public with its figures, it raised the shroud off "the deal." But by then, according to ANOTHER, it no longer mattered. The oil states had already (almost inadvertently) cornered the gold market. As implied by ANOTHER's own words, his motivation for these postings was the discovery by "big traders" in the Far East of this opportune facility to buy gold at ever lower prices. Their subsequent heavy purchases of physical gold upset the delicate balance. Now there was no longer a reason to keep it secret, and hence, the revelation of this extraordinary tale.

Getting back to Paul's original post and the Lowenstein article, I don't have a positive or negative impression of Bernanke and the job he's doing. His situation reminds me of Thomas Flexner's biography of George Washington where the Battle of Yorktown is discussed. Washington was extremely impressed (and perhaps somewhat embarrased at his own lack of knowledge of siege tactics) by the French officers' explanations that having trapped Cornwallis, the capture of the fort was inevitable once the proper trenches were dug at the proper angles for the artillery. The meta-narrative was written long before Bernanke arrived as Fed chairman. He's simply going through the formality of playing out the last 20 moves of a chess match already decided.

In other words, gold isn't good for much except hoarding, exactly what you want in a physical store of value that, when hoarded, won't negatively affect the world economy

But, if the main reason gold is desired as a store physical of value is that people choose, more or less on whim to value it, then it is per se not stable. As soon as their whim changes, the value can collapse. It is only when you have a store of value that is valued for for an objective reason (i.e. has some use apart from whim, such as oil, shoes, etc.), is the value stable despite whimsy. I would think that in the above description of gold you would always have to use "stable*" with the asterisk because it is based on (again) the sheer hope that others will have the same perspective on it that you do. The stability* is rooted only in confidence, a lot like the dollar.

(Try offering gold to a man who has to walk 60 miles across the desert to the next water hole. He'll take the same weight in water, and count himself lucky.)

Does the fact that a "store of value" needs to be not actually in use right now mean that it should be (by preference) something virtually unusable? What about something that we have more than we need immediately, but we use a lot of?

But, if the main reason gold is desired as a store physical of value is that people choose, more or less on whim to value it, then it is per se not stable.

Traditionally, gold has always been considered valuable, even when it is plentiful. It is more malleable than other metals and has a high luster, making it ideal for decorative use and jewelry. It was also one of the few metals that could be easily tested for purity by scratching an alloy against a touchstone, the resulting color showed what carat it was.

I would describe the characteristics of gold that Step2 mentions as the objective qualities that make it excellent for hoarding, that is excellent for storing value through time. Lustrous, malleable, fungible, rare but not too rare, etc. It's not whim. And we can see this historically. All the gold ever mined, and not lost, still exists almost entirely in unconsumed form as bullion or coin (or jewelry) stored in vaults or safe deposit boxes or sock drawers. Why do we still hold onto this useless stuff?

What about something that we have more than we need immediately, but we use a lot of?

During times of uncertainty the propensity to hoard the store of value may increase significantly. An economy may suddenly find itself with a severe shortage of a needed consumable commodity. Ideally, you want the store of value to be useful for one thing only, storing value.

If you think about it, it's also a feedback loop. If the store of value is never consumed then its supply is always known with great confidence, which helps reinforce the demand for it as a store of value.

In fairness to Bernanke, he came in too late to prevent the crisis. The real problem is that no one has actually punished the banks in a meaningful way for their patterns of fraud and other criminal behavior. Bank of America is still quite possibly the largest criminal enterprise in this hemisphere, but you wouldn't know it from the willingness of the government to unleash law enforcement upon the parties responsible.

Ideally, you want the store of value to be useful for one thing only, storing value.

But you just said that it has qualities that make it something valuable even aside from its store-house qualities: malleable, lustrous, hard enough to hold shape well (especially when slightly alloyed). These are qualities that make it ideal for such things as jewelry and decorations. Like silver and platinum, gold is desirable for such reasons regardless of storing value.

The point is, it is due at least in part to its qualities that are objectively valuable aside from storehouse qualities that make it something that people would want to have, from which arises being willing to consider it for a medium of exchange, which is the beginning of wanting to set it aside as a store of value. ONCE YOU HAVE something that is valuable in its own right, there are additional qualities that would make it an ideal storehouse object: non-breakable, non-consumable, semi-rare, coinable (that is, easy to put into definable units).

Aren't values always subjective?

Gian, all final (working) valuations are personal, and are therefore subject to the variables of personal motivations. But not all such motivations rest on purely subjective bases: jewelry generally needs to be lustrous, and gold is lustrous, so objectively it works for that purpose and that's an objective basis for valuing it.

I think that the distinction you may be looking for is "sentimental value" versus non-sentimental value. If I lost my wedding ring, I might well be willing to pay (to have it found) a good deal more than it would cost to purchase another just like it, since my value of it is based on what is distinctive to that _specific_ ring and no other. That's a sentimental value. Nobody else would be willing to pay that kind of money for a bit of gold. I don't think that most people would be willing to call the sort of value we put on food or water a sentimental value: your valuing it has objective bases, and varies only slightly from person to person.

"The strength of Apple’s relationship with consumers is a result of its ability to redefine the terms of competition in an industry and design emotionally rich ‘human’ experiences,” said Powney. “This research tells us Apple customers perceive a fit where at first glance we would assume the brand could not travel. To observe a ‘wrong’ and ‘make right’ is a core characteristic of this business.

Paul, all that is saying, when you break out all the gibble-gabble, is that the company finds things that the customers don't like currently and produces a new product / service that is better than the old way. That doesn't define Apple, it defines every good business. "Value-added" _just_is_ finding an improvement to offer. That's not "redefining the terms of competition", it's just competing well. Good for them.

I think that we have been bamboozled by the non-personal nature of corporations - which means that they are not subject to old-age and death like humans - into thinking that corporations need not have any kind of life cycle or life expectancy. But in fact such thinking is unsubstantiated. There are extremely few companies over 100 years old, many die within 5 years of starting, and most of the rest die or are bought out in somewhat less than 100 years. What would it mean to have enough confidence in Apple to rely on Apple paper for a medium of exchange, if you half expected Apple to be bought out within 20 years of when its founder dies, or carved up into separate entities (like the baby Bells) because its corporate philosophy is no longer tied to definitive individual persons?

'"The strength of Apple’s relationship with consumers is a result of its ability to redefine the terms of competition in an industry and design emotionally rich ‘human’ experiences,” said Powney.'

and

"all that is saying, when you break out all the gibble-gabble, is that the company finds things that the customers don't like currently and produces a new product / service that is better than the old way."

No, what it's saying is that Apple has found a way to dupe the consumer into thinking that its stuff is more than just stuff:

No, what it's saying is that Apple has found a way to dupe the consumer into thinking that its stuff is more than just stuff:

You make it sound like Apple is a huckster when in fact they arrived at their position of superiority by actually making genuinely better products. OS X did more to kick Microsoft in the pants to make Windows genuinely decent than anything else in the market. The iPod made digital music players sleek, easy to use and accessible for ordinary users. Heck, the iPad actually created the market for modern tablets as we know them. Before that, the "established wisdom" of the industry was that "no one wanted tablets." Apple products even now still "just work" in ways that most Windows users cannot easily accept. For example, I can use my Airport Express to connect iTunes to my receiver which lets my wife and I play music in surround sound without messing with external devices. I can also develop in anything from Perl and Ruby, to Java and C# on a Mac.

Yes, there was/is a cult around Jobs. I think you also underestimate how much he raised the expectations of the average user for the products they buy. Just compare the crap from Creative Labs to the iPod and iPod Touch to see an example of how he raised the bar in the industry.

What would it mean to have enough confidence in Apple to rely on Apple paper for a medium of exchange, if you half expected Apple to be bought out within 20 years of when its founder dies, or carved up into separate entities (like the baby Bells) because its corporate philosophy is no longer tied to definitive individual persons?

What I suggested is that high-grade corporate paper (of which Apple would be a example, but hardly the only example) could replace US Treasury as "risk-free" baseline for pricing fixed-income assets. Now, as we all know, risk-free is not; but bond markets need this pricing function, and we are projecting out to a day when US sovereign debt can no longer perform it. Apple currently has no long-term debt, and no plans to issue any. My conjecture is that if they ever issued 20- or 30-year bonds, institutional investors would be falling over each other to buy them and stuff them into vaults as a super-safe asset with which to anchor an investment portfolio.

My understanding is that, back in the late 90s as the US budget approached surplus (thus obviating the need for Treasury bond issuance), capital market actors had already laid the groundwork for this shift to high-grade corporate.

The essence of hucksterism is selling us stuff we don't need, or in convincing us that our mere wants are actually needs. We are hooked on technology. The average teen texts 60x a day, and goes into flippin' withdrawal if their "device" is unavailable for any length of time.

The essence of hucksterism is selling us stuff we don't need, or in convincing us that our mere wants are actually needs.

And that's precisely what happened when personal computers were created. No one needed them, they were just wants. There has never been a need to have one at home, and arguably not even for most companies. On the other hand, the reasons many wanted them (but didn't "need" them) were related to needs.

Funny how my personal narcissism device may have saved me from a car jacking in DC recently because I got off on the wrong exit and got lost near SE.

Tony, if you want to say that gold was first acquired so that one could admire its physical qualities (call that its primary use) and that when enough other people did the same a network effect takes over and bullion could then be used to store value (its secondary use), I'm fine with that. The point is that gold isn't consumed in either case and when hoarded as a store of value one can still enjoy its primary use and admire its qualities (or convert it to jewelry or if you're a wealthy cartoon duck, go swimming in it). Conversely, for example, if you hoard oil as a store of value you can't simultaneously consume it to generate energy.

>>I'm sure there was a time when a "horseless carriage" was a mere "want," a mere vanity device. Now, not so much.

Very true, unfortunately, which sort of demonstrates my point.

‘ ” I’m not sure he’s wrong about automobiles,” he said. “With all their speed forward they may be a step backward in civilization — that is, in spiritual civilization. It may be that they will not add to the beauty of the world, nor to the life of men’s souls. I am not sure. But automobiles have come, and they bring a greater change in our life than most of us suspect. They are here, and almost all outward things are going to be different because of what they bring. They are going to alter war, and they are going to alter peace. I think men’s minds are going to be changed in subtle ways because of automobiles; just how, though, I could hardly guess. But you can’t have the immense outward changes that they will cause without some inward ones, and it may be that George is right, and that the spiritual alteration will be bad for us. Perhaps, ten or twenty years from now, if we can see the inward change in men by that time, I shouldn’t be able to defend the gasoline engine, but would have to agree with him that automobiles ‘had no business to be invented.’ ” ‘

Spoken by an auto manufacturer in The Magnificent Ambersons (1918) by Booth Tarkington.

I actually agree with Andrew E that if gold were to "take over" as the world's reserve currency in some sort of universal way (I suspend disbelief to stipulate the occurrence), its value would be entirely wrapped up in its value -qua- currency: that is, any intrinsic value it might have would become effectively irrelevant.

Basically it would become a sovereign fiat currency without the pesky accountability of an actual visible sovereign, much as the libertarian fantasy in general ultimately devolves into a de-facto shadow aristocracy with no accountability.

And that is why so-called "hard" currencies in general cannot achieve, in reality, the goals for which their advocates support them. As with many libertarian impulses, the idea seems to be to wrest authority from the sovereign and vest it in ... nowhere in particular. The end result doesn't destroy authority, though, as the anti-authoritarian wishes. Rather it drives authority into a shadow world where we aren't allowed to criticize it, or make any attempts to hold it accountable. Liberalism always starts with an anti-authoritarian impulse and, in cocktail with the nature of the actual real world, ends in tyranny.

Prediction: Apple will, within a time frame of ten years or so, go the way of all competent monopolistic "walled garden" technology platform companies. That is, either it will reboot into something else entirely or shrivel (back) into irrelevance. Only a company of Microsoft's prodigious incompetence can survive for decades as a technology platform leader, by accidentally making its monopoly platform adaptable by third parties to all sorts of unexpected and highly profitable uses. Apple is far too good at restricting the most profitable businesses on its platform to itself; thus in the long run, its platform will die at the hands of more flexible, less centrally planned platforms.

I would argue that Zippy is mistaken if he thinks that foreign nations are, presently, truly sovereign with respect to their monetary policies. Given that most world trade is conducted in dollars AND most world savings are held in dollars of one form or another AND only the U.S. Federal Reserve can control the supply of dollars, the viability of all foreign currencies are dependent to some extent on an authority over which the issuers of such currencies have no direct control. This is why the euro was created, to restore economic and financial sovereignty to the European nations. And why the ECB chose gold as its reserve asset, knowing the world will not soon accept another unaccountable currency to serve as the universally accept reserve.

The hypothetical system I'm describing is not one where bullion is a currency (only, perhaps, in the sense of clearing trade) but a wealth asset. Sovereign currencies will still exist, sovereign authorities will still be able to debase their currencies to their hearts' desires in order to achieve various political and economic goals (not without consequences). But they won't be able to use monetary policies to loot the savings of the populace. Radical? Or just?

... the viability of all foreign currencies are dependent to some extent on an authority over which the issuers of such currencies have no direct control.

The viability of all currencies everywhere and at all times, including the US dollar and the ECB's reserves (which don't become "not currency, just a store of value" through nominalist fiat), is always dependent on all sorts of things beyond the issuer's direct control.

But they won't be able to use monetary policies to loot the savings of the populace. Radical? Or just?

Utopian fantasy, in my view. Not that I concede to "loot the savings" as a tendentious characterization; but when this particular Utopian fantasy meets reality, as with all other Utopian fantasies, all you have accomplished is to shuffle around who is doing the "looting" and how visible and accountable they happen to be. You need to read the Prophet Townshend.

The viability of all currencies everywhere and at all times, including the US dollar and the ECB's reserves (which don't become "not currency, just a store of value" through nominalist fiat), is always dependent on all sorts of things beyond the issuer's direct control.

And I'm arguing that Europe has moved to eliminate one important "thing" beyond their control.

Utopian fantasy, in my view. Not that I concede to "loot the savings" as a tendentious characterization; but when this particular Utopian fantasy meets reality, as with all other Utopian fantasies, all you have accomplished is to shuffle around who is doing the "looting" and how visible and accountable they happen to be. You need to read the Prophet Townshend.

I will look into Townshend. And I fully accept that if a new system emerges to replace the existing one, it will be corrupted over time. That doesn't mean the transition isn't coming anyway. Time will tell.

Got it. Expanding a bit further, I would say my view is that Europe chose this path in order to accomplish a few very specific goals which it certainly will. And that this system should have some beneficial second and third order effects, representing an improvement over what currently exists, which could last for a time before fading and perhaps giving way to yet another system. And on and on.

Basically it would become a sovereign fiat currency, without the pesky accountability of an actual visible sovereign

Zippy, I am having trouble understanding the interlocked concepts you have used, in that phrase. Isn't "sovereign" in the typical "sovereign currency" the authority of one who makes the laws and therefore controls, for example, the production or distribution of the currency if they chose to? How can a currency be a sovereign currency without a sovereign?

Likewise, how can a currency be a fiat currency without someone visible (or audible) to say "let it be so"? When everyone else follows along> with the declaration "let it be so", don't they have to be able to hear what they are following along with, what they are consenting to?

The real problem is that no one has actually punished the banks in a meaningful way for their patterns of fraud and other criminal behavior. Bank of America is still quite possibly the largest criminal enterprise in this hemisphere, but you wouldn't know it from the willingness of the government to unleash law enforcement upon the parties responsible.

This.

Financial markets without real risk and accountability are set up to be looted.
Bailouts, regulatory favoritism and an absolute lack of enforcement against fraud have scandalized the US (and world) economy.
If financial markets were forced to follow my Mom's rule ("clean up your own mess") we'd be far better off.

When Wachovia got caught knowingly laundering literally billions of dollars of drug cartel money, they were fined pennies on the dollar. My father as a federal agent routinely enforced money laundering laws against private citizens and helped to secure convictions that absolutely ruined such people. Yet, when a major corporation does it, it's reduced to what amounts to a cost of doing business even though it is on a scale that can only be described as "epic." Had Wachovia faced actual justice, it would likely have been bankrupted.

Only a company of Microsoft's prodigious incompetence can survive for decades as a technology platform leader, by accidentally making its monopoly platform adaptable by third parties to all sorts of unexpected and highly profitable uses.

Microsoft did that on purpose, Zippy. There was nothing accidental about it. They beat most of their competitors by being substantially more open, especially in the high end business market.

Microsoft deliberately chose to act against its own monopoly power? What meetings were you attending? That must have been in some Philip K. Dick novel. Microsoft succeeded precisely because of its incompetence as a monopoly platform developer. Apple will ultimately fail because it is a very competent monopolist. I know that goes against the capitalism-as-efficient-meritocracy narrative; but I think it is reality nonetheless.

Zippy, I have to say: Presumably you weren't attending the meetings either. Your comment implies that we should assume that neither Microsoft nor Apple could foresee the effects you are describing or could see that being a really good monopolist might be self-defeating. I have deliberately had little to say in this thread, and this will almost certainly be a hit and run comment. But this looks a little too much like, "Just take my word for it."

Nobody has to take my word for it that Microsoft during the PC era was 1) relentlessly monopolistic; and 2) technically incompetent. One only needs to have lived through the 80's, 90's, and 00's as a technologist. It is believing that Microsoft somehow deliberately orchestrated its own apparent incompetence in order to maximize market penetration which would require access to extraordinarily well hidden secret meetings.

You misunderstand my point. The terms imposed by Microsoft for developing on their platform were practically anarchistic compared to most of the industry from the 1980s to the late 1990s. Even today, Microsoft is more open and laissez faire than RIM or Apple in the mobile market. Microsoft won by waging a two front war on its competitors: one in sales with OEMs and others that controlled access to the end user and the other in winning the hearts of legions of small developers with tools that asked nothing of them in terms of royalties, high license costs or control over the product.

Most of Microsoft's critics in the 1990s also didn't want to admit certain things (I was guilty of this back then): Microsoft's competitors sucked even harder than they did. Netscape Communicator (version 4.X) was Dracula to Internet Explorer 4's von Helsing. Java, prior to version 1.2, was a toy. Microsoft, in their own perverted way, actually tried to make it less of one on Windows.

Really, the only competitor who actually had a valid complaint at the antitrust trial that I can think of was Be Inc.

I'm trying to figure out which element of my original comment you disagree with, Mike: Microsoft's relentless monopolistic tendencies, or its incompetence. Disagreeing with either one doesn't pass the laugh test, in my view. You might not agree that Apple's monopolistic competence will be its downfall, of course. Time will tell. Incidentally, Apple's monopolistic-platform competence was its downfall the first time around too, relegating it to single digit market share for decades in a market it created. History rhymes.

In any case, y'all be careful out there. And when you "save money", be sure not to "save" by putting cash in a piggy bank, especially if there is no central bank around with its printing presses and helicopters available to help keep prices stable at least in the short to mid term. Save up productive or at least intrinsically valuable assets for a rainy day. Never hold on to cash, which has only virtual value representing an incomplete barter, for any longer than you have to.

I was at a mountain retreat in the late '90s. A kind of gathering of startup company CEO's, investors, and industry leaders in California gold country. Jean-Louis Gasse (creator of the original Mac, founder and CEO of Be - this was before Jobs' return to Apple) gave a really fun and interesting talk. It was a small group of people - 50 or so I would guess - and I was right in front. We had had beers the evening before, he is one of those "larger than life" personalities.

Anyway, the whole time while he was giving his talk, his fly was open. What I found really hilarious in retrospect was that I couldn't decide if he'd done that on purpose, just to mess with us, or not.

'm trying to figure out which element of my original comment you disagree with, Mike: Microsoft's relentless monopolistic tendencies, or its incompetence.

The incompetence part. They didn't have the best products, but they knew how to play the game to win over the distribution channels (and then control them) and win over the minds of millions of small time developers.

Anyway, the whole time while he was giving his talk, his fly was open. What I found really hilarious in retrospect was that I couldn't decide if he'd done that on purpose, just to mess with us, or not.

I think the elephant in the room you are missing, Mike - which of Microsoft's competitors was actually competent, and lost because of its competence - is Apple. But anyway, at some point arguing about the historical causes of the Sack of Constantinople reaches an impasse. To me it is very clear that Microsoft succeeded, not merely in spite of itself, but precisely because, despite having ruthless monopolistic goals and drive, it was too incompetent to maintain the kind of platform control that Apple has always maintained.

To me it is very clear that Microsoft succeeded, not merely in spite of itself, but precisely because, despite having ruthless monopolistic goals and drive, it was too incompetent to maintain the kind of platform control that Apple has always maintained.

Again, we are judging them by two different metrics. You think Microsoft was too incompetent to maintain control, but it's not obvious that they even tried. Microsoft has traditionally only been interested in those markets adjacent to its platforms which create an immediate business need for the platform itself. Otherwise, Microsoft has always been content to let other companies build demand for its platform by creating a very low barrier to entry. The more apps, the more people can do with it, the more they will find they want to do with it.

Another bit of evidence in favor of my argument is DirectX. It was created to unify many of the technologies that vexed small developers and make them available in a fairly coherent and reliable API. Microsoft kicked Apple's head in in the mid 1990s because DirectX made it (no pun intended) "game over" for Apple in the game market. DirectX was easier to use, well-supported and Microsoft made it liberally available to anyone who wanted to mess with it. Now, DirectX runs on the XBox platform and PCs which makes it a no-brainer to target Microsoft's platform. Doing a dual release at once for home PC gamers and XBox 360 gamers is now within the budget of most small game studios.

You think Microsoft was too incompetent to maintain control [of the Windows PC platform], but it's not obvious that they even tried.

See, it is when you say stuff like that that I start wondering what planet you are from. It certainly isn't the one I grew up on.

Like Apple, Microsoft has always been content to let small-time developers make pockets of chump change (at least until their business models are proven to address markets in the billions, at which point you either accept whatever they offer to buy you out and move to Redmond, or commit seppuku), but has always attempted to assert control over any large, profitable software business on the PC platform. It has always used every legal and technical means at its disposal, including (as one example among hundreds or thousands) giving its internal Office application developers access to Windows API's which it did not publish or support for outside developers. But unlike Apple, the big Softy has always been too incompetent to successfully carry it off. As a result of its incompetence, Microsoft succeeded where Apple failed: Microsoft's incompetence was ultimately extraordinarily profitable.

Apple, on the other hand, has managed (again just as two glaring examples) a total, iron-clad monopoly on both the web browser and application software distribution to iOS. Need a web browser on your iOS device? Safari for you, and that's that: no unapproved capabilities allowed. Need to buy an application? Its the Apple App Store, and that's that: no unapproved software allowed.

It is true that OS X on the Mac has by its nature been relatively open, as far as Apple products go, largely as an accident of history (that's what happens when you build on open source Unix); but (1) the Mac is dwindling in importance as a product line and (2) Apple is taking steps to correct the mistake of allowing even developers to have actual access to the actual platform, as opposed to whatever Apple decides to grant them access to as the 'virtual platform.' In any case the Mac is a small product line for Apple now, since iOS dominates.

But really, I feel silly even arguing the point that Microsoft has always pursued as much monopoly power over the PC platform as its competence would allow it to achieve. The shark, she has been jumped.

See, it is when you say stuff like that that I start wondering what planet you are from. It certainly isn't the one I grew up on.

Actually, I think he's closer to the truth than you, Zippy. Microsoft started out as an OS company with MS-DOS and then moving into Windows and then moving into the application realm. Apple was designed as a closed system from day one. With Apple, everything from hardware to OS to apps was dictated by them. It was a true, vertically integrated product. Microsoft never started with that type of control in mind. If it had, Apple would have cleaned their clock. Instead, MS sold their OS to just about anyone who would pay and worked at creating a system that would allow multiple hardware and software vendors to supply products. In the end, a more loosely controlled model won out over Apple's iron fist. Apple would not be around today had not Microsoft actually pumped cash into them to help stave off the anti-trust lawsuits.

The complaint that MS buys out companies that show potential is a curious one. First, I've known people from one company (Foxpro) and been part of another company (happened six months after I left) that were bought out by Microsoft. Yep, they wanted you to move to Redmond. And they also paid real well and offered great stock options. I don't think MS is the only company that buys out companies that have products they believe they can use.

In the end, Microsoft is a company that started out as a single product company and expanded to take advantage of different markets. Do they want to dictate the desktop, sure. But, it wasn't incompetence that prevents them from doing that. It's that they didn't start out trying to control A-Z. On the other hand, Apple has always wanted to be the be-all and end-all. But, I think the Apple is just about to where they were in the late 80's and early 90's. They had a great product, were flush with cash, but their iron fisted grip on everything made them expensive. Once their mojo started getting hammered by far cheaper, more flexible, and almost as good products, they collapsed.

I thought that 2 major factors that influenced why Microsoft "won" were (a) they had the operating system for the first IBM-types, and the IBM-type architecture "won" because IBM allowed other companies to clone their x86 designs; and (b) MS borrowed Apple's windows user interface (a definite concept winner) and adapted it into a sufficiently different OS that they could get past Apple's patents. (a) wasn't really even an MS decision, and (b) was just hard-nosed competition in an already proven product concept. Microsoft's other practices were all pretty much frills layered on these two basic realities. Sure, MS was strongly monopolistic, but neither (a) nor (b) represent some kind of falling into success in spite of working against successful business models.

IBM also attempted, incompetently, to monopolize the PC platform. Remember micro-channel? Remember OS/2? Were any of the folks I am talking to actually "there", in the industry, while all this was happening?

It is true that part of Apple's competence as a monopolist has rested in its ability to control both the hardware and the software; and that this integrated approach is part of what limited it to single-digit irrelevance in a market it created. As far as I can tell, that merely reinforces my historical point and adds weight to my prediction vis-a-vis the post-PC platform. Microsoft succeeded precisely because of its incompetence as a platform monopolist and the general crappiness of its products; Apple will ultimately fail because of its competence as a platform monopolist.

Some folks don't like to believe that perversity and incompetence are ever rewarded by the market. But this is reality, not an Ayn Rand novel. In reality, perversity and incompetence are often rewarded by the market, and competence is often punished. The history of the PC platform is a clear case in point, in my view.

Microsoft made a commodity operating system that was generally open to anyone who wanted to buy a copy and write software for it. IBM never actually opened the PC platform; Compaq actually won in court to force them to acknowledge Compaq's right to make clones that didn't reuse IBM's IP in the BIOS.

IBM also attempted, incompetently, to monopolize the PC platform. Remember micro-channel? Remember OS/2? Were any of the folks I am talking to actually "there", in the industry, while all this was happening?

I remember OS/2, though I never used it. You seem to overestimate how long ago that was. Most of the geeks I know my age (almost 29) have seen or used OS/2. What IBM did or didn't do, successfully or unsuccessfully, is not much relevant to Microsoft. Most of Microsoft's success has been from walking a fine line of being friendlier to the public and developers than their competition while dealing ruthlessly with suppliers.

Microsoft succeeded precisely because of its incompetence as a platform monopolist and the general crappiness of its products;

You can keep saying this until the sun turns into a red giant, but that won't make it true.

In fact, I've posted a few counterpoints that you haven't addressed such as the key role that DirectX played in creating the modern home PC and then conquering a significant swath of the video game market.

One of the reasons Apple failed was because they were a monopolist, but another reason is that Microsoft had guys like Alex St. John in the 1990s who were actually more foreward-thinking in some frontiers than their competitors. DirectX would never have come from Apple or a big iron vendor. It was a technology specifically aimed at unifying and abstracting all game and multimedia concerns into a single large, high performance API with maximum hardware support. Contrary to your assertion, some of these decisions were quite intentional.

All of this MS and Apple argument is completely aside from the point of this post. Returning to Paul's comments,

What I suggested is that high-grade corporate paper (of which Apple would be a example, but hardly the only example) could replace US Treasury as "risk-free" baseline for pricing fixed-income assets. Now, as we all know, risk-free is not; but bond markets need this pricing function, and we are projecting out to a day when US sovereign debt can no longer perform it.

Paul, as long as we know that the paper that you are using to serve as a kind of base-line isn't really risk free, is it really "the" base-line? Is it even necessary for there to be any actual root entity that is called the risk-free baseline? Can't you, for example, price Apple and Coca Cola and Walmart (with their real and non-zero risks) and _project_ a completely theoretical risk-free base that houses no actual examples?

Admittedly, this would mean that there would not be a last-resort place for stashing your money "risk-free", but that's OK. Now that everyone has at least re-considered the question of whether Treasuries are risk free (even if only long enough to shudder and then stick their head back in the sand), doing without a concrete risk-free base-line issue should be conceivable.

I didn't address whatever it is you intended to imply in bringing up DirectX because I can't, for the life of me, see how a Windows graphics API in any way even slightly undermines my view.

As I said, DirectX is a hell of a lot more than just a "graphics API." It does everything a game designer would need except maybe certain aspects of network programming. In fact, it was designed explicitly to make developing games for Windows so much easier than for MacOS or other platforms that no one would want to. Today, many games for OS X use a variant of WINE to get DirectX compatibility because no one wants to rewrite perfectly good code in various other toolkits when Microsoft provides a one stop shop. Furthermore, DirectX was intended to be a driver that would not only consolidate the home market, but allow Microsoft to expand into the living room which they have done; every XBox and XBox 360 game uses DirectX. Microsoft is winning in the game market because in 1996 they laid the foundation for a unified platform that makes the game console and home PC use fundamentally the same software which means developing for their console is cheaper and safer than for Sony or Nintendo (to say nothing of the fact that Windows developers have a skill set easily transferred to the console market now).

Another reason, which I can't believe I forgot, that Microsoft won so much marketshare is that their products are far easier to do an enterprise roll out and maintenance without hiring a bunch of UNIX grey beards. Even today, the reason IE unfortunately holds a lot of swat in businesses is because it's substantially easier to do centralized management than Firefox or Chrome.

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